InvestorQ : What is the difference between risk-taking ability and risk tolerance?
Rishita Das made post

What is the difference between risk-taking ability and risk tolerance?

Aastha Awasthi answered.
1 year ago
Risk-taking ability depends on an individual’s age, net worth, cash flows, financial goals, family situation, etc. It depends upon the resources one has at their disposal in proportion to their needs and wants. The smaller your needs and wants are in comparison to your financials, the more room they have to take risks. For instance, A and B need Rs 1crore for retirement. At the time of retirement, A has a net worth of Rs1cr while B has a net worth of Rs10cr. The risk-taking ability for B is clearly higher than A. Even if B loses some money, they still have money for a comfortable retirement.  

Risk tolerance, on the other hand, is purely individualistic and psychological. In simple words, risk tolerance is nothing but an investor’s ability to take or ‘tolerate’ risks. It is the amount of risk that you are willing and capable of taking on. There are various facets to risk tolerance.

Typically, an aggressive investor will have a higher risk tolerance whereas a conservative investor will have lower risk tolerance. Some investors are by nature more aggressive and therefore they have higher risk tolerance. At the end of the day, risk tolerance is measured by your ability and your willingness to take on risk in exchange for higher returns.